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Wednesday, April 18, 2018

WHEN A TRADE GETS “CROWDED”

“Well, so does a crowded GBPJPY trade!”

As a trader, you simply can’t carry any position through a major report; to do 
so is suicide. Today’s main event, U.K. inflation data, where the trade [retail 
spec & hedge fund institutional] is the most long in over 5 years … and so, 
what happens when a “crowded trade” filled with longs, meets a weaker than 
expected inflation report, which just might put a damper on that first interest 
rate hike in over 10 years? “Well, WHOOSH! is what happens … in other words, 
“down goes Frazier”, and with that, you get about 70 lower in under a second”.  
And although we’ll never know, I’m not so sure we wouldn’t have gotten the 
same result if the numbers had been “hot”, cuz you got too many people on the 
same side of the trade for it too work … “the trading universe simply does not 
allow everybody to walk away happy”.

Yesterday I mentioned Cousin It’s research; and while I guided it, came up 
with the criteria, proof read it to make sure he didn’t take 2+2 = 22, he did all 
the leg work. And now, three more “gems” contained in the data; 1) since the 
start of 2011, approximately 35% of all trading days had AT LEAST a 150+ 
PIP daily range in GBPJPY, many substantially more than 150 PIPS, 
2) approximately 7% - 10% of those days had a substantial portion of the 
day’s range due to “news events” [like today] … these would be central bank 
interest rate decisions, minutes of said decisions, employment data, & inflation 
data, and 3) over 90%+ of the “pony rides”, i.e., moves that go straight with  
“pure M30’s”, meaning  when going up the previous M30 LOW is never 
breached, and when going down the previous M30 HIGH is never breached, 
ALL START between 06:00 - 09:00 server time. Sure enough, most of the other 
10% “pony rides” will start in the U.S., either after inflation data or NFP 
@ 12:30 server time, or at 18:00 server time on interest rate decisions from the 
FED.

And sure, some of the “news event” days will work out fine, but many of them 
won’t … I’m just assuming for analysis purposes, that they all don’t, and they 
end up being scalp days of relative low number of PIPS for profit.

So, factor all these days out, and along with major Holiday days, and you end 
up with about 210 “pure” trading days per year, where there isn’t going to be a 
“news event” to disrupt things, although we can never know when clueless Twit 
Pols show up and move their lips. Simply “zooming out” on the daily 
candlestick for GBPJPY, there were about 70 days I saw when counting in the 
last year, from April to April. Ok, doing some “back of the envelope math”,  
what’s 35% of 210? Well, it’s 73.5, so the 70 I counted is right in the ballpark. 
And that breaks down to about 6 per month, where I said yesterday that 2 or 
3 would be substantially higher than 150 PIPS, and would be “bigly & yuge”  
in scope.

For trading purposes, I don’t care if the day’s range is 160 PIPS or 360 PIPS 
… obviously the greater the number the more opportunity … what matters is 
the “style” in which they share their common trait; which is, they’re both  
“pony rides”, and if not because of some “news event”, they will look strikingly 
similar on the M1 for both. As well, those days which are relatively “normal”,  
like March 13, 2018, which I wrote about yesterday, have enough of a “pony 
ride” in them to make them highly profitable. All my readers know I talk and 
write about “setups” in trading, and how important they are … here, in the 
ultimate “Dragon Trade” [the nickname for GBPJPY], it’s as important as ever, 
cuz get caught on the wrong side of this Yo-Yo will be painful.

Over the upcoming weekend, I’ll be adding another data file to “Download 
Links” over in the right-hand column … it will be the M30 candlestick charts 
from 06:00 - 18:00, with commentary, for each day of the month, and the data 
file will start from the start of 2018 through the present, and be updated at the 
end of every month. Here, in one place you’ll be able to look at a daily 
candlestick chart history, and “cherry pick” which days you’d like to find out 
how the M30’s behaved, and exactly how many trend changes there were 
during the 12 hour window of our trading … and what you will see over time is 
an amazing correlation between all those days that are approximately 150+ 
PIPS in scope, and how they trend and therefore trade. They’ll be broken 
down by month, so anybody can see very quickly any day that interests you, 
and you can either view it online or download it for your files. “Of course it’s 
free, simply follow the link”.

Turning to today’s market … “well, that escalated quickly to the downside, 
didn’t it”? … and from the disappointing inflation miss for Cable bulls, 
minutes later, it was like somebody flipped the light switch off and said, “hey, 
let’s go watch an EPL soccer game … and the world said right on”, cuz all we 
got now is chop.

And, it’s no wonder, cuz again today USDJPY is dead in the water “dullsville” 
[since 2 A.M. (9 hours ago), USDJPY has a 28 PIP range], meaning of course 
GBPJPY = GBPUSD, and that most often means choppy trading conditions. 
And the very last thing you want to be facing, is GBPJPY chopping around any 
level with the scumbag LP banks happily handing out slippage, and the market 
going nowhere fast … just fast enough to hit your “puke point” and then go the 
other way.

Only one short trade today … PAMM up a few bucks over 0.1%.

Ok, the U.K. data is out, the market gaps sharply lower, the spreads are wide 
for another 2 minutes, and then things return to normal. We get a little rally 
and when it starts to fade, I initiate the short position … it’s a winner right 
away, and I’m figuring maybe Cable has more downside to the mid 1.41’s, and 
can the market get USDJPY under 107 … “ummm, no on both accounts”. And 
while I’d love to hold it if it starts to leak major water here, I also know the 
inflation miss wasn’t that horrible, and GBPJPY has been in a very strong 
uptrend since the first of March, covering 10 handles [1,000 PIPS] … so while 
I will be on the “pony” as long as possible, if it starts to act like it’s bottoming, I 
will liquidate and then come back … “well, that didn’t take long did it”? … cuz 
off the bottom in less than a second, it jumped up 4 PIPS, and that to me is a 
clear sign of a short term bottom; maybe not “the” bottom, but close enough I 
don’t want to get caught in a potential vicious short covering rally and be 
forced to “pay up”.

Assuming this market doesn’t come back in the hours ahead, it’s somewhat 
rare to get GBPJPY to put in highs or lows on a “V shaped” low or an inverted  
“V shape” high … usually there are some tests of support or resistance before 
the move away, but not today. Directly below, the M30 from Monday 
[April 16th], Tuesday [April 17th], and today [April 18th], in the format which 
the archive will record them … i.e., 2 charts per week, the first Monday, 
Tuesday & Wednesday, and the second chart of Thursday & Friday. From my 
perspective, looking at the M30 directly below, my eye caught the double 
turnaround in trend via 3 & 4 on the chart [TODAY’S], and that sent “red 
flags” up the flagpole warning of imminent chop dead ahead.

[click on chart to enlarge] 

In actuality, after the report, all you’re left with is a 60 something PIP range 
[so far], with 7 trend changes in 7 hours … “does this look, sound, or feel like a 
pony ride”? [Hint: “err, no Skippy”.] And while I have no idea what happens in 
the next 2 ½ hours to our 2 P.M. close, it sure doesn’t look promising that 
anything other than what we’ve seen the last couple of hours will surface. Take 
away that sharp candlestick drop at 08:30 server time, from today, which came 
and went in seconds, and you got a crap day with nothing, just like the 2 
previous days of the week … and, it’s no coincidence, all three days look 
remarkably “crappy & similar”, which is plenty of chop and a high number of 
trend changes. Scroll back to yesterday’s blog, where even a normal day of 
March 13, 2018, and you’ll see a completely different style to the M30.

In essence, the M30’s serve a dual trading capacity; 1) tradeable trend, and 
just as importantly 2) our risk control parameters … the first not because it’s 
a “slam dunk” the next M30 has the same trend as the previous one; it’s 
because during all the “pony rides” you ultimately want to capture for mucho 
“bigly & yuuge” bucks … weekly, monthly, & yearly into the future ... they all 
will be practically the same, and they occur on average once every three 
trading days, which is often enough for me to be very excited about it … “what 
good does a signal do if it only reveals itself 3 times every 7 months? … I’m a 
trader, not an analyst, and I need to have an income during bull, bear, & neutral 
markets, often enough where the risks are acceptable for the reward … and boy, 
does this market offer reward”!

This morphs right into #2, which is risk control, simply cuz we are never more 
than the depth in price of the last M30, even if you somehow forgot the M1 
5 & 9 signal generator and stayed with a bad trade. So, adding it all up, low 
risk for relatively small PIPS, against the backdrop of a market that loves to 
run and put in some eye watering moves in relatively little time. As I said in an 
earlier blog, don’t let the “simplicity” of the algorithm fool you into thinking it 
can’t be that effective … “au contrare Skippy, it’s the very best algorithm I’ve 
ever seen in dealing with FX cross pairs, cuz these animals can go anywhere and 
do anything”!

By now, you should have a better understanding of why this algorithm was 
soooooo successful, when I was trading GBPJPY with SAXO Bank from 
2005 - 2010, where daily ranges routinely were in the range of 250 - 450 PIPS 
per day, and the price was in the 200 - 260 range, compared to today at around 
150. But comparatively, based on percentage moves of the underlying price, a 
300 PIP range day when the price is 240 = a little over 1% … a percentage 
move of a 150 PIP range day when the price is in the 150’s is relatively the 
same.

The big difference, of course, between now and then is SAXO BANK in 
2005 - 2010 had the lowest spread in GBPJPY going at 6 ½ PIPS [no 
commission]… Turnkey today has a 0.4 - 0.8 [on average] PIP spread, with a 
meaningless round turn [RT] commission of $2 per 100,000 notional traded 
… that’s one helluva a difference, and when SAXO got rid of all their U.S. 
clients in 2010, the next best available was HOT Forex which was at 9 PIPS 
… with daily ranges falling, there isn’t any way come “hell or high water” I’m 
going to be trading and paying the scumbag LP banks that kind of “juice”.

And so, not being able to trade GBPJPY effectively, I ditched the market and 
the algo, and headed for other markets with completely different personalities 
and parameters. But unlike other pairs in FX, one wrong move in the crosses 
usually means big losses for ordinary traders … and if you’re trading size, it 
only compounds the problem. 

My mistake, if you want to call it that, is simply one of “cognizance” … as 
spreads dropped along with ranges, not really thinking about the fact the 
relative percentages were the same, and then returning to the pair … instead, 
I’m off into other dimensions uncovering algorithm properties that do well in 
other markets … until, of course, they didn’t … which meant “tweaking” 
properties of various algorithms to solve problems … and of course, thanks to 
the Mrs., it all comes back in a flash via deja vu, over a dinner with friends 
back in January.

But, the algorithm does more than give us trend & control risk … “it hits dead 
on turns in the market, where your brain & guts are either screaming “buy 
Mortimer, buy”!, when you should be selling, or “sell Mortimer, sell”!, when you 
should be buying” … one of its greatest attributes, is that we are never more 
than one M30 away from any kind of top or bottom, no matter if it’s short 
term or long term in nature, and after you follow it for a while, you begin to 
understand how this market should be  viewed for profit. In today’s trading 
environment, the only other FX cross that comes close using the algorithm is 
GBPCAD, which is a decent alternative, but I like the added liquidity of 
having USDJPY in the denominator instead of CAD.

Another day, outside of the one second of U.K. data, that was rather boring 
and unremarkable … at least I got back what Monday’s action saw … still, I’ll 
patiently wait for the next “pony ride”, cuz that’s where the “paydays” are. 
Some data out tomorrow and tonight, with retail sales at 08:30 server time, in 
the U.K. headlining the day, which could move the market … softer data here, 
and I’m wondering about that “slam dunk” interest rate increase supposedly 
coming up shortly … we’ll see … I’m outta here … until tomorrow mi amigos 
… Onward & Upward!!

PAMM spreadsheet directly below.


Have a great day everybody!

-vegas

OUR TURNKEY FOREX “PAMM/MAM” IS NOW OPEN AND
OPERATIONAL; SEE “PAMM/MAM MONEY PROGRAM” IN
“DOWNLOAD LINKS” SECTION IN RIGHT HAND COLUMN
FOR DETAILS [VIEW ONLINE AND/OR DOWNLOAD] AND
START YOUR JOURNEY FROM WHERE YOU ARE AT TO
“ESCAPE TO SUCCESS”!


  
 




















 

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